He rose rates having, fundamentally, no idea what it would do. People are criticizing it, having no idea what it really did. Did he save the economy? Would it have been worse without his intervention? Is he responsible for that unemployment spike?

No one knows. Central banking is just an incredibly arrogant activity. Believing you know how to set the dials for an entire country...it's the economic version of the God complex.

12:37 pm January 18, 2012

Humphster wrote:

Whatever else may be true, it was Mr. Simor's responsibility and his alone. No one that I know has suggested that Mr. Simor was politically motivated while large numbers of people suggest that Mr. Orban was.

1:35 pm January 18, 2012

Enforce the Forint transactions, and outlaw other currencies in Hungary. wrote:

Foreign currency borrowing should be outlawed. The reason there is a sovereign national currency in the first place, is to use it for all internal transactions. All those Swiss franc mortgages should have been illegal. If you go to the USA, Canada, Japan etc. you do not see mortgages, or any other loans, in other currencies than their national currency.

2:31 pm January 18, 2012

Margarethe von Weiss wrote:

In Mr Simor's position, having made so many professional errors, I would publicly reassure the European Union that a monthly salary of 2 million forints (about 10 times the average salary in Budapest) is fully adequate for my needs, and that I really don't require or deserve my old salary of 8 million forints (80 times the average salary in Budapest).

7:05 pm January 18, 2012

Steve wrote:

Mr Simor has really done a lot of harm to that country. The least he should do is step aside. But what he does is starting an open warfare with the government.
Why the EU/US are interfering is beyond me. These undemocratic meddling will hurt them more on the long run.

9:51 pm January 18, 2012

Dodo wrote:

Mr Simor's predecessor, Mr Jarai (2001-2007), a political ally and appointee of Orban's, is the real culprit in forcing Hungary down the tube.

He raised interest rates extremely high after the Socialist & Liberal government took power.
Basic rate of the Hungarian National Bank:
June 10, 2003 - 6.50%
November 28, 2003 - 12.50%

Mr Simor's big fault is not being a member of the Fidesz Maffia.

Orban can easily concede on the issue of the Central Bank - he will appoint Mr Simor's
successor in a year, in March 2013.

11:03 pm January 18, 2012

Jan wrote:

[1/2]

I also have just read the entries ‘Hungary’s Monetary Policy Mistakes’ and ‘Poland’s Kaczynski to Hungarian Leader’s Rescue’ on the ‘Emerging Europe Real Time’ blog.

What Mr Kaczynski wants to say may be “They are neo-communists!”

He’s getting warm, albeit highly misleading. We need to use Ockham’s razor and forget conspiracy theory in the first place. What may appear to be a conspiracy could always be no more than part of normal money-politics, just as financiers in Wall Street are in fact openly flocking to Willard Mitt Romney, making the candidate increasingly harder to maintain a fair view on the topics of capital-market reform. The financiers are never hiding their support to Mr Romney. It is just that we other people tend to overlook the fact, thus we are to blame as well. What Mr Kaczynski may be thinking of as neo-communists do not necessarily regard themselves as communists but just as neo-classicists. They are what you call textbook economists, who overlook some important factors ‘characteristic of the real world’.

Communism is incomplete without an eternal equilibrium at full employment. In John Maynard Keynes’ point of view, the Walrasian equilibrium is infeasible with money. Hence, as the Soviets did, the transition to communism is said to be socialism with money and a complete central planning. The Soviets completely overlooked market principle. On the contrary, Poland’s Oskar Lange adopted neoclassical analysis and insisted on adopting market principle to central planning. His view was ‘theoretically’ right as America’s Kenneth Arrow and Gerard Debreu mathematically proved, but it was just ‘unrealistic’. Hungary’s Janus Kornai actually tried to input factors of market principle in his central planning in an attempt of materialising a first approximation of an eternal equilibrium at full employment – only to fail. America’s Joseph Stiglitz, George Akerlof and Michael Spence explained how the principle of information asymmetry distorts markets, making full employment unsustainable. That is, their study proved that the neoclassical vision was ‘unrealistic’. That is, money is the sole mediator of the complex of asymmetric information in the real world. Keynes (and Kalecki) is invincible.

The problem is that you can’t get rid the real world of the principle of information asymmetry.

Nevertheless, many in Brussels and Washington (i.e. the IMF) as well as many in state-governments, whether federalists or anti-federalists on the EU, persistently try to adopt the neoclassical theory to the real world. That is not because they are neo-communists but because they honestly believe in the validity of the neoclassical vision for a healthy development of market-economy and democracy or effective improvement of common wealth and common welfare. They are also called ‘eventualists’, for they stick to Say’s law or eventualism. Hence, when they press austerity on Hungary, they may honestly believe that it would save Hungary in the long run. In the long run, that is. How long, nobody knows. In Keynes’ point of view, if Hungary gives in to Brussels right now, the aggregate volume of investment will recover fairly quickly due to ‘capital inflow’ or a fresh and massive flow of external debt. The GDP will thus recover fairly quickly. But, Hungary’s capital accumulation will remain poor. It is another Washington-Consensus-style bubble that may expand for a decade or so to cause a bigger pop later. The ‘eventualist’ cycles are too dynamic for ordinary Hungarians. The neoclassical economics only aggravates the vicious cycles.

Japan evidenced from the second quarter of 1997 to the second quarter of 1998 that austerity only expanded public debt. It is Mr Simor’s big mistake indeed. The right policy for Hungary to take ‘for the time being’ must be expansionary. The government must not reduce its annual expenditure. The central bank should have not taken the Austrian policy but drastically cut the key rates. The IMF must inject money into Hungary. The clue is not to cause a deep recession. While Japan’s public debt relies very little on foreign banking systems (95 per cent of its public debt is held by its domestic banking system), Hungary heavily: As Hungary’s private sector increasingly gives up, it will correspondingly desperate for financial helps from the public sector, for the foreigners are reluctant to expand lending to Hungary for the time being. A deep recession in Hungary may infect, through the international banking system, the economies like Austria in which banks have been heavily lending to Hungary. A bigger trouble in the Austrian banking system will infect the entire Europe and thus the World.

The Austrian-school economics’ policy is applicable only to the case of a complete market failure and, as importantly, both for a very short period of time and in a selective manner. The case of a complete market failure is clearly visible with hyperinflation. Poland adopted it in the early 1990s, and the reasons why Leszek Balcerowicz was great are that he decided before 1990 that a complete market failure was both imminent and unavoidable with the coming fall of the communist regime and that a shock therapy was necessary but both for a decidedly short period of time and in a decidedly selective manner. A lot of people notice the first reason but at the same time overlook the second. If you implement a shock therapy ineffectively and thoroughly, the economy will become a Russia of the 1990s instead of a Poland of the same era. Getting back to the subject, this is not the time that the Hungary central bank should implement the Austrian-school-style monetary policy. Hence, it is, as largely as Mr Orban’s poor accountability, Mr Simor’s hastiness that has caused the mess of today’s Hungary.

[to be continued to 2/2]

11:04 pm January 18, 2012

Jan wrote:

[2/2]

As for thorough reform of the economic structure of Hungary, that is necessary but it must be both less prioritised than the immediate expansionary policy and, if to be done, taken in the way against the Washington consensus. My idea is following:
1. Fiscal discipline – The present ‘strict criteria’ for limiting budget deficits have been too inflexible, inelastic and static and based on analysis of equilibrium as opposed to analysis of the disequilibrium characteristic of the real world. They should be made more flexible, elastic and dynamic to be able to fight against large market-fluctuations.
2. Public expenditure priorities – Adopting a more selective moving-away scheme from subsidies. Holding a consensus that fields with high economic returns in view of sustainable growth cannot be decided in advance, the authorities should not commit themselves deeply to concrete business fields, especially in producing consumer goods and consumer services. They should instead focus on capital goods including the grand design of infrastructure in the economy.
3. Tax reform – Considering the propensity to consume, liquidity-preference (i.e. mechanism of rate of interest) and marginal efficiency of capital, the way to stabilise economies is to raise marginal tax rates. Cutting marginal tax rates only expands the propensity to save and the liquidity preference and presses down the schedule of the marginal efficiency of capital. The information technology has been increasingly enabling us to crack down tax evasion, especially international money transaction and money laundering. Hence, it is much less urgent to broaden the tax base then when the Washington Consensus was drawn.
4. Financial liberalisation – Interest rates should not entirely be market-determined. The liquidity-preference theory explains that interest rates are decided not by what the loanable fund theory and the quantity theory of money explains. They are largely decided by expectations that can always overshoot, resulting in either a long stagnation or a large jubilee or haircut.
5. Exchange rates – should be managed to materialise and maintain the grand system in which capital will ‘gradually’ be transferred from the capital-rich economy that hold the de facto key currency (i.e. the USA) to capital-poor economies through the system of international trade. In the system, the US dollar is roughly maintained in the range with which the US will roughly and stably keep marking a moderate level of current account deficit. The IMF should work for the purpose.
6. Trade liberalisation – should be much more selective, considering non-quantity and fixed factors of production that differ between economies. The claim for free trade that free trade may increase the collective marginal utility through the effective allocation of rare resources that international trade enables and through international division of labour sounds reasonable, but it hasn’t a sufficient theoretical background. The claim is based on the extremely precarious and sanguine assumption that the autonomous stability of the system of markets will make interest rates and investment levels automatically aligned to the levels that will materialise the state of full employment. We must be more cautious and gradual in dealing with this issue.
7. Increasing foreign direct investment (FDI) – is also extremely precarious and sanguine, for there is always a massive grey-zone of capital inflow in which no one can strictly tell credit for stably-fixed capital from credit just for hot money.
8. Privatisation – should be selective. Some state enterprises and state-owned joint-stock enterprises actually largely contribute through dividends and special taxes to service public debts and full employment. Whether those enterprises work effectively should rather be a question how public audit is should be managed and improved. It is when the system of public audit doesn’t work sufficiently to maintain a state-owned enterprise effectively that the authorities should consider privatising it. Haphazard privatisation will only result in either a contraction of the economy or an increasing reliance on capital inflow to sustain its growth (See 7).
9. Secure intellectual property rights (IPR) – This must be more selective. An excessive state of securing IPR leads to monopoly (Ref. the ‘present’ US economy), with the opposite case being plagiarism and bootlegging.
10. More selective reduced and increased role for the state.

They say the Washington consensus has been replaced by a post-Washington consensus. That is highly misleading. The gist of the consensus, which is basically neoclassicism or Robert Solow’s idea of economic development, is still alive and haunting economies not only developing ones like Hungary but also developed ones like the United States and Japan and international institutions like the IMF and the European Union.

It is not necessarily a conspiracy but largely a collective honesty that has been working. According to a Jedi master, It is ideas of economists and political philosophers, not necessarily vested interests, which are dangerous for good or evil.

9:21 am January 23, 2012

Anthony Nemet wrote:

I like to ad some facts to Mr.Matthew Walton's article about Mr. Andras Simor salary cut. Mr. Walton is not correct when he quotes salary cut for Mr.Simon alone. The new government of 2010 needed to make major cuts in government expenditures. In accordance with new economic decisions all government employees salary was cut to less than Ft.2000000 yes 2 million forint per month. Mr. Simor is getting his salary from Hungarian tax payers his pay was cut. Why not the ECB, IMF or the bank of Basel pays his monthly wages?
Another fact, Mr. Simor as far as the average Hungarian knows hi is a tax cheat. If Mr. Walton doe's not know I like to provide him with some facts. Mr. Simor took his money sum of 1,000,000,000 Ft. he earned in Hungary to Cyprus offshore accounts with out paying the proper income tax in Hungary. He claims he payed the taxes but when the authorities ask him to show proof, he refuses. Saying he only obligated to the ECB, IMF, Basel committee on banking. He is also maintaining a monetary policy which goes against the government economic policies. If the national bank of Hungary is really Hungarian Simor should be supporting the Hungarian economic policies. Otherwise we need to change it's name to International banks in Hungary.

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The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.